Re: ECB and world-wide recession

["schulte-baeuminghaus" <cresscourt@xxxxxxxxx>]

Sven,

The ECB has been illustrating several of the faults of an independent
central bank.
My general position has always been that the responsibility of
governments for maintaining stable growth and employment - high rates
of investment, rising productivity and production - should not be
abdicated to so-called experts most of whom have shown their
inadequacy in many countries over several decades.
In a situaion in which the rate of interest has become such a key
device in the maintenance of a healthy economy - and society and
political unit - it is particularly regrettable that the power to
determine interest rates is hived off to an "independent" central
banker or groups of central bankers who are not miracle workers, who
are often inefficient, who are or are driven to be too single-minded
in their mandate to "fight inflation," who are too self-conscious
about being "strong" or "weak", who are not democratically (or
otherwise) accountable, etc etc etc.
Governments should govern, not abdicate crucial responsibilities.
This whole schemozzle serves as a strong indication that the EU must
make up its mind - destructive as that might be - whether they are
going to have a real political, social and economic union -
alternatively, a genuine federation - or be satisfied with something
that is not much more than a free-trade area (substantially modified,
especially for agriculture) with a CET, and leave it at that. The
latest German attempt, brave though incomplete as it seems, might pose
the issue but is unlikely to resolve it.


James Cumes



----------
>From: Sven R Larson <larson@xxxxxx>
>To: "pkt@xxxxxxxxxxxxxxxx" <pkt@xxxxxxxxxxxxxxxx>
>Subject: ECB and world-wide recession
>Date: Thu, May 3, 2001, 12:20 pm
>

> Hi everyone,
>
> Today's Wall Street Journal Europe reports on the ECB and its stubborn
> refusal to cut its leading interest rate. While all main indicators show
> that most of Europe is now in a recession (latest figure: manufacturing
> is down) the ECB still refuses to cut interest rates. This time, though,
> the refusal is not spoken in sotto voce, but outlined with unusual
> strength. Here's what WJS Europe quotes the bank to say:
>
> --The ECB can't save the world even if it wanted to. The bank and Europe
> cannot be the "white knight" of the world economy.
> --According to the Maastricht treaty the ECB is constrained to inflation
> policy, and cannot expand into employment boosting.
> --Europe's economy is "set to" outpace the US economy in 2001 and that
> means there's a risk inflation will rise. Hence the bank has to keep
> interest rates up to curb the upcoming expansion.
> --It's better for employment and growth that euro-zone governments slash
> debt and thereby give themselves "more flexibility" in spending.
> --Weak euro, recent wage raises and the oil price situation all point at
> more inflation.
>
> It's worth to keep in mind that the ECB maintained its interest rate
> high in its first year of operation way past the point where a cut was
> needed, only because the German finance minister publicly called upon
> the bank to cut. This was Duisenberg's way of showing political
> independence, but at the price of becoming weak on the markets. This
> time the bank is in a similar situation, where external pressure makes
> them all the more persistent. The Maastricht treaty does indeed ban
> employment concern from the list of reasons why the bank should cut
> rates, but all the bank has to do to circumvent the treaty's statutes is
> to say it doesn't expect inflation to rise because of the rate cut. But
> this doesn't happen, and it won't because Duisenberg wants to show he's
> independent.
>
> At the same time, I honestly don't think an ECB rate cut would make very
> much of a difference. Not only is the bank a weakling in the eyes of
> international investors, but its rate cuts are also to a large extent
> inefficient in terms of boosting aggregate demand. If it helps
> households by cutting debt service costs, then that's fine. But it won't
> trigger any expansion in the private sector so long as euro-zone fiscal
> policy is such a mess as it is. Some countries are pursuing expansionary
> tax cuts, while others seem to go straight in the opposite direction.
> (Italy under Berlusconi would add to the latter crowd.)
>
> If the ECB does nothing it's a sign of weakness and will hurt the euro.
> If it does something it's a sign of weakness (they will look like
> they're caving in under political pressure) and the macroeconomic
> effects will be untraceable. What troubles me here is that a weak ECB
> might prevent the formation of a consistent fiscal policy in the
> euro-zone. So the question is really how on earth we're going to make
> the ECB strong - if that's at all possible. (Disbanding the ECB is
> simply unthinkable for political reasons.)
>
> /srl
>
>
> --
> Sven R Larson
> PhD; Assistant professor of economics
> Department of Social Sciences, Bldg. 22.2
> Roskilde University
> Pb 260
> DK-4000 Roskilde, Denmark
> Phone: (+45) 4674 2910